Authid Inc. (then ID Global Solutions Corporation; later renamed Ipsidy Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing was signed April 27, 2017. Comparative 2015 figures were restated.
Business context
The company developed biometric identity-management and electronic transaction-processing solutions for government, enterprise and consumer markets. Its operations included payment processing, card products and Colombian transit-ticketing kiosks. The February 2016 acquisition of FIN Holdings added biometric fingerprint technology and Cards Plus card products; reported 2016 results include FIN from its acquisition date.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2016 | Comparison / balance-sheet detail |
|---|---|---|---|
| Revenue | $596,201 | $1,406,942 | 2015 restated: $75,312 and $86,358, respectively. 2016 included $33,050 of lease income for the nine-month period. |
| Gross profit and margin | $479,825; approximately 80.5% | $1,057,908; approximately 75.2% | Calculated as revenue less cost of sales. |
| Operating loss | $(1,884,857) | $(10,429,513) | 2015 restated: $(3,700,259) and $(4,902,156), respectively. |
| Net income (loss) | $(4,333,036) | $2,526,783 | 2015 restated losses: $(28,406,361) and $(32,509,982). Nine-month 2016 income included a $16,082,616 noncash gain from revaluing derivative liabilities. |
| Cash from operating activities | Not reported as a quarterly figure | $(3,062,854) | 2015 restated nine-month use: $(1,480,567). |
| Cash and liquidity | Cash: $234,812 at Sept. 30, 2016 | Current assets $1,242,952; current liabilities $15,657,310; working-capital deficit approximately $14.4 million. Current ratio approximately 0.08. | |
| Debt and other current liabilities | Notes payable, net: $1,983,215; convertible notes, net: $2,339,375 | Derivative liability: $9,319,015. Total current liabilities were $15,657,310. |
Stockholders’ deficit was $3,153,596. Total assets of $12,503,714 included $6,736,043 of goodwill and $3,508,617 of net intangible assets, largely reflecting acquisitions. The filing reports $6,805,776 of stock-based compensation for the nine months, a significant noncash expense. Interest expense was $3,126,320.
Material changes versus the prior comparable period
- Revenue increased substantially from the very low restated 2015 base, primarily reflecting acquired businesses and new kiosk leasing activity. The comparison is not on a like-for-like basis.
- Nine-month operating expenses rose to $11,836,455 from $4,988,514, including acquisition-related amortization and $6.8 million of stock compensation.
- Despite positive reported nine-month net income, the company had a $10.4 million operating loss and used $3.1 million of operating cash. The net-income result was heavily influenced by the noncash derivative revaluation gain.
- Cash declined from $349,873 at December 31, 2015 to $234,812. Financing activities provided $2,585,483 during the nine-month period.
- The 2015 comparative results were restated for, among other matters, derivative valuation, intangible-asset valuation, stock compensation, software costs and debt issuance cost accounting.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. Continued operations depended on additional financing, shareholder support, cash generation and winning clients; none was assured. Management said available cash was insufficient for ongoing development and operations. No numerical earnings or revenue guidance was provided.
- Subsequent financing: After quarter-end, the company reported a December 2016 $1.275 million note financing; conversion of approximately $6.3 million of debt and accrued interest into about 84.8 million shares in January 2017; a $3 million senior unsecured note financing; and a March 2017 equity offering of $4 million, of which $3.17 million had been received as of March 22. Management said these actions addressed near-term financing needs but further financing would likely be required.
- Large kiosk contract remained uncertain: A December 2016 Colombian contract contemplated 740 kiosks and approximately $30 million of payments over ten years, excluding VAT. It required a $6 million performance bond and equipment financing; neither had been secured as of the filing. The parties were renegotiating scope and possible phased delivery, which could reduce contract value and bond requirements.
- Dilution and compensation: The company issued 25 million shares for $1.25 million in August 2016 and granted substantial options. It reported 87.8 million options and 51.1 million warrants outstanding at September 30, 2016. Subsequent debt conversions and financing added further shares.
- Controls and reporting: Management concluded disclosure controls were ineffective because of material weaknesses, including limited segregation of duties, reliance on outside consultants and attorneys, and the absence of a formal audit committee. Remediation actions were being pursued after the reporting period.
- Other items: The company wrote off approximately $225,862 for an abandoned product-testing asset. It reported no pending or threatened material legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the income figures: the statement of operations reports third-quarter net loss of $4,333,036, while the comprehensive-income statement shows a different net-loss figure of $4,033,036 and a comprehensive loss of $4,351,340.
- Assess cash runway, debt maturities and the availability and terms of future financing; the filing identifies going-concern uncertainty and a substantial working-capital deficit.
- Confirm the status, financing, performance bond and final terms of the Colombian kiosk contract, including whether the planned installation and economics changed.
- Evaluate dilution from outstanding options and warrants, the January 2017 debt conversion, and subsequent equity financings.
- Review the restated 2015 figures and the company’s progress in remediating its disclosed internal-control weaknesses.